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Questions and Answers
What is credit risk?
What is credit risk?
- The probability of financial loss due to a borrower's failure to repay a loan (correct)
- The probability of high interest rates affecting loans
- The probability of economic downturn in the banking sector
- The probability of a bank's insolvency
What is a major risk trigger for higher credit risk in a bank?
What is a major risk trigger for higher credit risk in a bank?
- Diversified lending portfolio
- Stable economic conditions
- Credit concentration (correct)
- Low interest rates
What is the impact of credit risk on a bank's lending activities?
What is the impact of credit risk on a bank's lending activities?
- Credit risk only affects the borrowers
- Higher credit risk can lead to financial loss for the bank (correct)
- Credit risk has no impact on a bank's lending activities
- Lower credit risk leads to increased profitability
What does inappropriate credit underwriting process refer to?
What does inappropriate credit underwriting process refer to?
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What is an example of credit concentration?
What is an example of credit concentration?
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Study Notes
Credit Risk
- Credit risk is the possibility of loss due to a borrower's failure to meet their debt obligations.
Triggers of Higher Credit Risk
- A major risk trigger for higher credit risk in a bank is a decline in the borrower's creditworthiness, often due to economic downturn or industry disruptions.
Impact on Lending Activities
- Credit risk can significantly impact a bank's lending activities, as it can lead to loan defaults, reduced lending capacity, and increased provisioning for potential losses.
Inappropriate Credit Underwriting
- Inappropriate credit underwriting process refers to the failure to properly assess a borrower's creditworthiness, leading to the granting of loans to borrowers who may not be able to repay.
Credit Concentration
- An example of credit concentration is a bank having a large percentage of its loan portfolio concentrated in a single industry or geographic region, increasing its vulnerability to sector-specific or regional economic shocks.
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Description
Test your knowledge of credit and financing risk management with this quiz on understanding credit risk. Explore the key concepts related to credit risk, including the probability of financial loss, borrower default, insolvency, and adverse economic conditions.
